European Stocks Climb as Credit Costs Ease; RBS, Daimler Rally

By Sarah Thompson

Oct. 29 (Bloomberg) -- European stocks gained for a second day as falling credit costs spurred a rally in financial shares, while higher commodity prices pushed up oil and metals producers.

Royal Bank of Scotland Group Plc, Allianz SE and Axa SA jumped more than 10 percent as money-market rates dropped in Europe, the U.S. and Asia. Daimler AG surged 19 percent after Merrill Lynch & Co. said the carmaker's shares were ``oversold'' following a 45 percent slump this month. Rio Tinto Group climbed 13 percent as copper advanced for a third day, while Royal Dutch Shell Plc rose 7.9 percent after oil gained more than $3 a barrel.

The drop in money-market rates ``shows that the system is beginning to unclog,'' said Charles Mackinnon, chief investment officer at London-based Thurleigh Investment, where he manages the equivalent of $256 million. ``That will eventually lead to less volatility in markets and that will bring us out of this slump.'' He spoke in a Bloomberg Television interview.

Europe's Dow Jones Stoxx 600 Index climbed 5.7 percent to 210.66 at 2:20 p.m. in London, with all 19 industries advancing except for automakers as Volkswagen AG tumbled 41 percent.

The market extended early gains after China cut rates for the third time in two months, while U.S. stocks gyrated ahead of the Federal Reserve's decision on interest rates today. Increased commercial paper sales helped send the Dow Jones Industrial Average to its second-best point gain yesterday.

More than $11 trillion has been erased from the market value of equities worldwide this month, accounting for about one-third of the total value wiped off stocks this year, as $681 billion of writedowns and losses by banks triggered a freeze in credit markets. The Stoxx 600 has retreated 18 percent in October.

Asia, Emerging Markets

The MSCI Asia Pacific Index increased 3.7 percent today as investors speculated Japan will cut rates. The MSCI Emerging Markets Index rose 3.3 percent, gaining for a second day, as Hungary received an International Monetary Fund-led $25.5 billion loan and governments in Russia and Kazakhstan bought shares in their nation's companies. Hungary's BUX Index jumped 13 percent, the most in 10 years. Russia's Micex Index rallied 11 percent.

Royal Bank of Scotland, the U.K.'s fourth-largest lender, climbed 13 percent to 64.1 pence. Allianz, Europe's biggest insurer, rallied 17 percent to 56.50 euros. Axa, the region's second-largest insurer, jumped 16 percent to 14.005 euros.

Efforts by governments and central banks worldwide to bail out banks and cut borrowing costs are showing signs the paralysis among lenders is easing. Hong Kong's three-month interbank offered rate, or Hibor, declined 30 basis points today, the most in a week, on prospects for rate cuts.

13th Straight Drop

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 5 basis points to 3.42 percent, its 13th straight drop. The rate is down 140 basis points since Oct. 10. The comparable euro rate fell 2 basis points to 4.83 percent, the 15th consecutive decline, and losing lost 56 basis points since Oct. 8, BBA data showed.

In the U.S., sales of longer-term commercial paper soared 10- fold after the Federal Reserve began buying the corporate IOUs.

Futures on the Chicago Board of Trade show a 50 percent chance the central bank will trim its target for overnight bank loans to 0.75 percent from 1.5 percent. The odds increased from 46 percent yesterday. The rest of the bets are for a half-point reduction.

ECB Rate Outlook

European Central Bank President Jean-Claude Trichet said Oct. 27 the bank may cut rates next week as the financial crisis damps inflation.

``Europe is snapping back on the sharp rise in Wall Street last night from incredibly oversold levels and in anticipation of interest-rate cuts,'' said Nick Brind, a London-based money manager at New Star Asset Management, which oversees about $25 billion.

Rio Tinto Group, the third-biggest mining company, rose 13 percent to 2,556 pence. BHP Billiton Ltd., the world's largest, gained 13 percent to 950 pence.

Copper for delivery in three months climbed as much as 7.9 percent to $4,455 a metric ton, extending yesterday's 2.7 percent gain.

Shell, Europe's largest oil company, advanced 7.9 percent to 1,648 pence. Total SA, the region's third-biggest, added 9.6 percent to 41.29 euros.

Crude for December delivery climbed as much as $4.24, or 6.8 percent, to $66.97 a barrel in New York.

Daimler surged 19 percent to 23.005 euros after Merrill upgraded the stock ``buy'' from ``neutral.''

RSI Signal

``Any improvement in the macro outlook, debt market outlook, or even any progress on a further Chrysler disposal could lead to some bounce-back in Daimler shares,'' London-based analyst Harald Hendrikse wrote in a note to clients today. ``Daimler shares are discounting a lot.''

Daimler's relative strength index, a technical measure used by some analysts to predict moves, closed at 27.46 yesterday. A reader below 30 indicates the stock may rise, according to the analysts.

Volkswagen tumbled 41 percent to 554.69 euros after its biggest shareholder, Porsche SE, said it will take steps to increase the supply of stock after a so-called short-squeeze spurred a fourfold rally in the past two days.

Porsche, which said Oct. 26 it has options equivalent to 31.5 percent of Volkswagen's common stock ``to hedge against price risks,'' may settle as much as 5 percent of those options, it said in a statement today.

``Porsche SE intends -- depending on the state of the market -- to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares,'' the carmaker said in a statement to the German stock exchange today. ``This may result in an increase in the liquidity of the Volkswagen ordinary shares,'' said Porsche, the maker of 911 sports cars.

Porsche soared 21 percent to 58.14 euros.

Deutsche Boerse AG, operator of the Frankfurt stock exchange, said late yesterday it will reduce Volkswagen's weighting in the benchmark DAX index to 10 percent after the stock's surge.

Bayer AG surged 11 percent to 42.71 euros. Germany's largest drugmaker confirmed its sales and earnings forecast for the year, even as profit missed analysts' estimates.

To contact the reporters for this story: Sarah Thompson in London at sthompson17@bloomberg.net;